• Stay BUY and MYR1.93 TP, 25% upside and c.4% yield. Sunway Construction’s 1H22 core earnings met our and Street’s expectations, accounting for 52% and 55% our and Street’s full-year projections. Looking ahead, we reiterate SCGB as a frontrunner for the elevated works portion of Mass Rapid Transit 3 (MRT3) given its lean balance sheet to take up large projects. Aside from that, its listed parent should continue to support earnings visibility – 46% of its orderbook comes from internal building contracts from its parent.

• Results review. SCGB reported a strong 2Q22 core net profit of MYR38.4m, which was >100% YoY higher, underpinned by the 49% YoY expansion in revenue that reached MYR557.9m (2Q21: MYR375m). In terms of PBT, the construction segment reported a >100% YoY growth amid normalisation of works to full capacity. Meanwhile, its precast segment recorded a 2Q22 PBT of MYR1.9m vs breakeven level (achieved in 2Q21) in the absence of restrictions seen in 2Q21, whereby pre-cast plants were allowed to operate at 60% capacity. Cumulatively, SCGB recorded a 1H22 core earnings of MYR73.3m (>100% YoY).

• Prospects. SCGB’s outstanding construction orderbook stood at MYR4.2bn as at end 2Q22 (end 1Q22: MYR4.4bn), which should support earnings visibility well into FY24. New YTD date job wins currently stand at MYR563m vs its FY22 job replenishment target of MYR2bn – this includes the district cooling system project for ENGIE Services Malaysia and the Light Rapid Transit 3 (LRT3) GS06 package by Setia Utama LRT3 among others. We believe its replenishment target can be met, as SCGB stands a high chance to clinch jobs from the MRT3 project – either CMC301 (estimated value: MYR3.3bn) or CMC302 (estimated value: MYR16.2bn) given its previous track record under MRT2. The contract value attributable to SCGB is subject to the stake in the JV or consortium formed when bidding. It is also looking to participate in the pre-qualification stage for the Bayan Lepas LRT, which has a 7 Oct deadline.

• Forecasts and valuation. We make no changes to our earnings forecasts as results were within expectations. Our valuation target P/E of 15.5x is pegged to our FY23F EPS and remains unchanged. The valuation target is fair, in our view – to reflect SCGB’s high likelihood of securing MRT3 jobs. The target P/E is above KLCON’s forward P/E of 12.1x, considering SCGB’s strong orderbook/revenue cover of c.2.6x that is backed by a robust balance sheet with manageable gearing. All in, our MYR1.93 TP remains unchanged after imputing a 4% premium to our intrinsic valuation based on our proprietary ESG scoring methodology. Valuations appear undemanding, as the stock trades at 13.3x FY23F P/E, -1SD from its 5-year mean. Key risks include project delays and a prolonged period of high material costs.

Source: RHB Research - 24 Aug 2022